The Proposed Volcker Rule Amendments

In late May, the Federal Reserve approved the release for comment of proposed amendments to the Volcker Rule. The other four agencies that share in rulemaking authority for the rule subsequently also approved release of the proposed rulemaking.

In addition to tiering banking entities based on the size of their trading assets and liabilities, which should not affect the most frequent issuers of structured products, there are a fair number of proposed changes relating to proprietary trading that will affect structured product issuers. The proposed revisions would replace the intent purpose test of the proprietary trading definition with an objective accounting prong. The accounting prong is intended to capture instruments that are recorded at fair value. While it is clear that the accounting prong would cover derivatives, additional clarification may be required in order to understand how it w related to a structured note). Certain trading desks are subject only to the accounting prong and not to the market risk and dealer prongs of the proprietary trading definition. Helpfully, compliance with expected near-term customer demands (RENTD) requirement would be presumed provided that the banking entity maintains and enforces trading desk limits. The hedging exemption also is proposed to be revised to eliminate the requirement to show that the hedge demonstrably reduces or otherwise significantly mitigates an identifiable risk, which is helpful to structured products market participants.

We discuss the proposed amendments in more detail in our client alert, which is available at

EU Provides Clarity on TLAC and MREL

In late May, the European Union reached an agreement to reform certain requirements applicable to European banks relating to total loss-absorbing capacity (TLAC) and the minimum requirement for own funds and eligible liabilities (MREL). The agreement is reflected in a legislative package called "Risk Reduction Measures."

The MREL requirement applies to all banks, not just to banks that are globally systemically important banks (G-SIBs). The agreement clarifies that certain structured notes will qualify for MREL. To the extent that a structured note has a fixed and ascertainable principal amount and only an additional return depends on the performance of a reference asset, the note will count toward MREL. The "embedded derivative" cannot be subject to netting.

For G-SIBs, the EU Council has confirmed that floating rate notes that reference a widely applied benchmark index are eligible liabilities for both TLAC and MREL. This is a helpful confirmation. These notes, often referred to as "lightly structured notes," were thought to qualify but there had been no certainty. Under the Federal Reserve's final TLAC rules, many practitioners had concluded that rate-linked notes would generally qualify as TLAC. While the EU Council's interpretation is not binding in any way on U.S. banks, it does suggest that regulators were focused principally on the ease of valuing a note in resolution and, to the extent that the reference rate is widely known, the valuation should not be problematic.

The Risk Reduction Measures also address other matters, including the calibration of MREL, MREL subordination, and the TLAC and MREL compliance dates.

Deductibility of FINRA Claims

The U.S. federal income tax deductibility of settlements paid to the Financial Industry Regulatory Authority, Inc. ("FINRA") has long been an area of uncertainty in the U.S. federal tax law. Tax reform legislation passed in December 2017, commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"),1 made FINRA settlements much more difficult to deduct.2

FINRA is a private, non-profit organization that is registered with the SEC as the only self-regulatory organization regulating the securities industry, which it does by way of an agreement between its members. FINRA members agree, among other things, to comply with federal securities laws and the rules and regulations thereunder, and to submit to FINRA sanctions if such members break FINRA rules. FINRA is not a part of the United States federal government, and the sanctions and fines imposed by FINRA are not remitted to the United States. The organization is subject to oversight by the Securities and Exchange Commission (the "SEC"), but such oversight is limited.


1 Pub. L. 115-97, 131 Stat. 2054 (2017).

2 For detailed coverage of the changes to section 162(f), please see "New Restrictions and Reporting Requirements to Consider During Settlement Negotiations" available at

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